Smart contracts are automatically executed without explanation, based on predetermined conditions set out in the contract. Because blockchain is a distributed ledger technology (DLT) that allows data to be globally stored on different servers, it relies heavily on these repositories to confirm transactions. So smart contracts are calling for the elimination of administrative overhead.
Smart contracts represent terms and conditions written in code that automatically transfer funds from one party to the other once the predefined requirements of the contract are met. For example, when two parties agree to exchange cryptocurrencies, the transaction will be carried out with a blockchain ledger via a protocol tied to a smart contract.
Today, smart contracts are still popular in the crypto industry, mainly used to exchange cryptocurrencies. But it's not limited to cryptocurrencies; in fact, many insurance companies and real estate companies are adopting this standard protocol for better scalability at a lower price. In short, smart contracts are an important part of many platforms. That's why it's crucial to have a clear understanding of what smart contracts are about and how they work.
What is the purpose of smart contracts in blockchain?
Since smart contracts are programs that run on the blockchain, users need to send transactions to the blockchain to start the program. Once the code has been defined and the logic locked, only the program can be run.
In general, the main purpose of smart contracts is to simplify business transactions between parties by removing the intermediaries involved in traditional business processes. These contracts are designed to reduce payment delays, risk of error, and the complexity of traditional contracts without compromising authenticity and credibility.
Its main unique advantage is that it allows trusted transactions to take place without intermediaries.
How smart contracts work in blockchain?
Smart contracts are computer algorithms designed to form, control and provide information about asset owners. It is indeed a program that runs on the Ethereum blockchain to automatically facilitate, verify or execute trusted transactions. To understand how it works, we must first understand what constitutes an intelligent contract.
• signature. Two or more parties must agree to advance the proposed terms and conditions.
• Critically determine the object of the contract. The topic should be in the context of an intelligent contract environment.
• Please specify the terms. These terms need to be precise and detailed. For example, Ethereum's smart contracts rely on Solidity and Serpent programming languages, so agreements should be compatible with precise language in specific mathematical terms.
After setting these requirements, you can enter a blockchain-based smart contract. However, the agreement needs to be negotiated before the terms can be implemented in the blockchain.
Typically, smart contracts automatically trigger actions based on the protocol between two consumers maintained on the blockchain. This means that when the seller intends to sell the BTC, the smart contract transfers the management until the BTC is successfully transferred from one person to another. When that happens, the money will be released and nothing will change. All transaction information will be listed and stored in a public database.
Who created smart contracts?
The concept of intelligent contract was first put forward by the famous American cryptographer Nick Szabo. In 1996, he published an article on smart contracts in Extropy magazine, predicting the benefits and features of the application of blockchain contracts. Over the next few years, he developed the concept in several articles.
Ian Grigg and Gary Howland are other contributors to the concept of smart contracts. They published their work on Ricardian contracts in 1996 as part of Ricardo's payments system.
The implementation of smart contracts became possible after bitcoin and its blockchain emerged and created the right conditions. A few years later, the innovation finally spread on the Ethereum blockchain. Today, many alternative platforms allow users to take advantage of this feature, but Ethereum remains a pioneer.
How do smart contracts work?
As mentioned above, smart contracts represent computer agreements or, simply put, snippets of code that are basic technical elements. They are used to specify all conditions of agreement reached between parties to a blockchain transaction. Once these conditions are met, smart contracts are automatically traded.
Blockchain-based systems allow their participants to reduce intermediation and excessive paperwork because it relies on public books where any interested party can verify all transactions. The core requirement here is to describe all protocol conditions by mathematical rules using appropriate programming languages.
Blockchain represents a decentralized network of nodes, each storing information about all transactions. More than 50% of all of these nodes must be controlled in order to undo a transaction or double flower.
Suppose a person wants to initiate a smart contract, they need to download special software and generate a public key to publish in the system. A startup message should then be sent and the node will receive it. When the event established by the smart contract is complete, the code executes.
For example, if certain requirements are met (paying a certain amount of money), the vending machine will automatically provide the ordered goods to the buyer. Smart contracts work in the same way.
In addition to transferring funds, there are several other use cases:
• Digital identity: It removes forgeries and provides personal identity for digital assets.
• Financial security: They're great for debt management, automatic payments, or stock splits.
• Trading activity: Smart contracts offer a great way to automate trading operations. Moreover, with their help, cross-border payments and international trade have become easier to manage.
• Clinical trials: It provides visibility across agencies, facilitates and automates data sharing, and reinforces confidentiality.
• Government: Smart contracts can improve transparency and efficiency of voting.
Smart contract use cases are mutable and cover countless opportunities. They have the potential to become powerful tools in many areas of human activity.
Characteristics of intelligent contracts
Smart contracts have some distinctive features that set them apart from other forms of financial transactions:
• Autonomy: Users have full control over their protocols. The smart contract itself is a guarantee that precludes interference from any other partner (broker, lawyer, notary, etc.).
• Security: A basic purpose of smart contracts is to secure transactions. Information entered into the blockchain cannot be deleted or modified. Even if one of the parties violates its terms, the agreement remains intact.
• Speed: If manual document processing takes a lot of time, it can delay the task. Smart contracts minimize individual involvement and improve overall efficiency.
• Trust: Transaction participants do not need to trust each other or partner vendors. A decentralized network provides an environment to ensure that tasks are completed without problems or delays.
• Cost-effectiveness: Excessive transaction costs can be eliminated. And this is possible by removing the middleman from process and protocol support.
• Accuracy: The process is automated, thus significantly reducing the possibility of human error.
Examples of smart contracts
Smart contracts apply not only to cryptocurrency transactions, but also to everyday tasks in financial services, the Internet of Things and more. To your surprise, they are more practical than anyone thought.
Internet of Things (IoT) : The concept of adding Internet capabilities to everyday objects in the home. Smart contracts enable users to achieve decentralized and trusted access control over Internet of Things systems.
Employment contracts: Smart contracts make them easy to enforce. In human resources, employee details such as salary, professional roles and responsibilities can be easily recorded by using smart contracts. At the same time, the transparency and immutability of smart contracts enhance trust between employers and employees. Both parties may only use smart contract technology to record part of the agreement. In this case, the contract could be:
• Fully automated without paper copies;
• Partially automated, with paper copies (in which case it is necessary to agree on which variant has higher priority, text or code);
• Partial automation, mainly on paper (for example, smart contracts only regulate payment, whereas dispute resolution procedures can be found in paper contracts).
• Copyrighted content: The content owner should receive royalties, but it is often difficult to determine who is the valid content owner, as creating a single work can involve multiple parties. Smart contracts make it easy to understand the rights and responsibilities at any stage of the creative process.
Which cryptocurrencies and DApps use smart contracts?
Today, smart contracts are closer to our daily lives than people think. Now it is not just big business that endorses them. Many blockchain platforms use them in their activities and use a variety of programming languages to write smart contracts.
Ethereum is one of the most popular options; This is why its original coding language, Solidity, is widely used by developers. Other blockchains may choose something different.
Here's an overview of the blockchain that can handle smart contracts:
Bitcoin: The Bitcoin blockchain allows files to be processed using smart contracts. However, there are limits to how you can handle these files.
NXT: NXT provides the smart contract template. However, the choice is limited because there is not much space to customize.
Ethereum: Ethereum thrives on smart contracts because it supports advanced coding and processing with flexibility and efficiency. The downside, however, is that it comes at a cost. Suppose you want to customize something, but you need to contribute ETH tokens as payment for the computer power to perform it.
Stellar: This may be the oldest smart contract platform, but its speed and security are arguably better than Ethereum's. It has a simpler, more direct, and easier to use interface. However, it is not suitable for complex contract development, as it is primarily intended to facilitate simpler smart contracts.
Some of the most popular smart contract-based Dapps include online financial platforms like MakerDAO and Compound, as well as decentralized exchanges like Uniswap.
Pros and cons of smart contracts
There are no one-size-fits-all solutions, including smart contracts. Sure, it's helpful in the decentralized world of encryption, but it has its limitations. Here's what you need to know:
The advantages of smart contracts are obvious, which is the basis for the increasing popularity of smart contracts. They are autonomy, security, high-speed performance, and the possibility of reducing costs associated with intermediaries. People choose them because they promise affordable but accurate and efficient business transactions.
• It is true that smart contracts allow for the exclusion of human error from operations. But at the same time, the smart contract code itself can be flawed and vulnerable. These mistakes can lead to great losses. There have been numerous instances of platforms being hacked and money stolen due to certain code errors. Take the infamous DAO hacker.
• The legality of such smart contracts is another point of discussion. It is not clear how governments and legal authorities should treat and regulate them, as they are outside national legal systems. Whether they can be considered contracts by government agencies is a moot point. Being outside the legal system also means criminals can use the technology for illegal activities. Ultimately, that's because smart contracts aren't always black and white. So the terms and conditions are vague.
• Irreversible nature.
Not being able to change something in an intelligent contract can also be a disadvantage. Fixing errors and changing contract terms would be an insurmountable problem.
• Privacy penetration
Transparency is a good thing, but not always. Sometimes users need some privacy. Some platforms try to offer "smart private contracts" to their users, but this is not common. In addition, there can be costs involved in introducing new technologies. Only experienced developers can create solid smart contracts.
In general, the technology still raises a lot of questions. But what about the future? Will a new technology overcome its limitations or replace it entirely?
What is the future of smart contracts?
It is clear today that the acceptance of smart contracts will only grow over time. Of course, they won't completely replace traditional paper contracts in the coming years, but they will carve out their own share of the market, especially when buying or exchanging goods, services and rights. There is no doubt that they will enter more and more areas of people's lives.
The legitimacy problems of many countries will be resolved in the next few years because they are inevitable. Even today, Arizona and Nevada have amended their state versions of the Uniform Electronic Transactions Act (UETA) to explicitly include blockchain and smart contracts.
The benefits of smart contracts cannot be denied or underestimated. They appear to be a good alternative to traditional protocols, providing a higher level of performance. If they manage to get positions, they will occupy contractual territory and the agreement will be changed forever. They will change the way people do business.
Low cost, reduced fraud and delay, and full autonomy make smart contracts attractive to the public. But smart contracts will only become more interesting if they increase the efficiency and certainty of transactions and reduce the need for partner vendors.